An online forum of the ABA Section of Antitrust Law's Privacy and Information Security Committee

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Technology companies – from startups to megacorporations – should not overlook an old privacy foe: the Federal Trade Commission (FTC). Since its inception in 2002, the FTC’s data security program has significantly picked up steam. In the last two years, the FTC has made headlines for its hefty privacy-related fines against Google and photo-sharing social network, Path. In January 2014 alone, the agency settled with a whopping 15 companies for privacy violations. What is more, many of these companies’ practices were not purposefully deceptive or unfair; rather the violations stem from mere failure to invest the time and security resources needed to protect data.

Vested with comprehensive authority and unburdened by certain hurdles that class actions face, the FTC appears poised for more action. The FTC’s basis for its authority in the privacy context originates from the Federal Trade Commission Act (FTC Act) and is quite broad. Simply put, it may investigate “unfair and deceptive acts and practices in or affecting commerce.” In addition to this general authority, the FTC has authority to investigate privacy violations and breaches under numerous sets of rules, including the Children’s Online Privacy Protection Act (COPPA), the Fair Credit Reporting Act including disposal (FCRA), the Gramm-Leach-Bliley Act (GLB), and the Telemarketing and Consumer Fraud and Abuse Prevention Act. Nor is the FTC hampered with the requirements of private class action litigation. For example, successful privacy class actions often must establish that consumers were harmed by a data breach (as in In re Barnes & Noble Pin Pad Litigation), consumers actually relied on a company’s promises to keep the information confidential (as in In re Apple iPhone Application Litigation), or the litigation will not be burdened with consumer-specific issues (such as whether the user impliedly consented to the disclosure, as in In re: Google Inc. Gmail Litigation).

The FTC has often focused on companies failing to adhere to their own stated policies, considered a “deceptive” practice by the FTC. More recently, the FTC settled with the maker of one of the most popular Android Apps, “Brightest Flashlight Free.” While the App informed users that it collected their data, it is alleged to have failed to disclose that the data would be shared with third parties. And though the bottom of the license agreement offered consumers an opportunity to click to “Accept” or “Refuse,” the App is alleged to have already been collecting and sending information (such as the location and the unique device identifier) prior to receiving acceptance. Just last week, the FTC settled with Fandango for failing to adequately secure data transmitted through its mobile app, in contravention of its promise to users. The FTC alleged that Fandango disabled a critical security process, known as SSL certificate validation, which would have verified that its app’s communications were secure. As another example, the FTC recently settled with a maker of a camera device used in homes for a variety of purposes, including baby monitoring and security. The device allows the video to be accessed from any internet connection. The devices are alleged to have “had faulty software that left them open to online viewing, and in some instances listening, by anyone with the cameras’ Internet address.”

Companies have also been targeted for even slight deviations from their stated policies. For example, the FTC recently reached settlements with BitTorrent and the Denver Broncos. The entities were blamed for falsely claiming they held certifications under the U.S.-EU Safe Harbor framework. In reality, the entities had received the certifications but failed to renew them. The safe harbor is a streamlined process for US companies (that receive or process personally identifiable information either directly or indirectly from Europe) to comply with European privacy law. Self-certifying to the U.S.-EU Safe Harbor Framework also ensures that EU organizations know that the organization provides “adequate” privacy protection.

Perhaps most surprising to companies is the FTC’s assertion that it may require them to have reasonable data protection policies in place (even if the company never promised consumers it would safeguard the data). Failure to secure data, according to the FTC, is an “unfair” practice under the FTC Act. For example, the FTC recently settled with Accretive Health, a company that handles medical data and patient-financial information. Among other things, Accretive was alleged to have transported laptops with private information in an unsafe manner, leading to a laptop (placed in a locked compartment of an employee’s car) being stolen. It is estimated that the FTC has brought over 20 similar types of cases, but all but one settled before any meaningful litigation. The one: a case against Wyndham Hotels. There, the FTC has alleged that Wyndham failed to adequately protect consumer data collected by its member hotels. According to the FTC, hackers repeatedly accessed the data due to the company’s wrongly configured software, weak passwords, and insecure servers. Though Wyndham’s Privacy Policy did not technically promise that the information would remain secure, the FTC faulted it for the lapse anyway. Wyndham has challenged the FTC’s position in federal court and a decision is expected soon.

Being a target of an FTC action is no walk in the park. In addition to paying for attorney fees, the FTC often demands significant remedial measures. For instance, the company may be asked to (1) create privacy programs and protocols, (2) notify affected consumers, (3) delete private consumer data, (4) hire third-party auditors, and (5) subject itself to continual oversight by the FTC for 20 years. What is more, if a company ever becomes a repeat offender and violates its agreement not to engage in future privacy violations, it will face significant fines by the FTC. In this regard, for example, Google was required to pay $22.5 million for violating a previous settlement with the FTC.

All told, technology companies should not feel emboldened by recent class action victories in the privacy context. To avoid FTC investigation, they should carefully review their data handling practices to ensure that they are in accord with their privacy policy. Further, they would be wise to invest in the necessary resources required to safeguard data and regularly ensure that their methods are state of the art.

Two opinions recently issued from the Northern District of California have important implications for parties seeking privacy class actions. Both opinions highlight the evolving jurisprudence around establishing standing for consumer privacy lawsuits.

In re Apple iPhone Application Litigation

On November 25, 2013, Judge Lucy Koh granted Apple’s motion for summary judgment on all of plaintiffs’ claims in In re Apple iPhone Application Litigation, 11-MD-02250-LHK (N.D. Cal. Nov. 25, 2013). Plaintiffs alleged that Apple violated its Privacy Policy by allowing third parties to access iPhone users’ personal information. Based on those misrepresentations, plaintiffs claimed they overpaid for their iPhones, and that their iPhones’ performance suffered. Plaintiffs also alleged that Apple violated its Software License Agreement (“SLA”) when it falsely represented that customers could prevent Apple from collecting geolocation information by turning off the iPhone’s Location Services setting. Plaintiffs alleged that, contrary to this representation, Apple continued to collect certain geolocation information from iPhone users even if those users had turned the Location Services setting off. Based on the SLA misrepresentations, plaintiffs alleged they overpaid for their iPhones and suffered reduced iPhone performance. Plaintiffs argued that Apple’s alleged conduct constituted a violation of California’s unfair competition law (“UCL”) and the Consumer Legal Remedies Act (“CLRA”).

Judge Koh disagreed, finding that plaintiffs failed to create a genuine issue of material fact concerning their standing under Article III, the UCL, and the CLRA. Judge Koh held that plaintiffs presented enough evidence of injury—that plaintiffs purportedly overpaid for their iPhones and suffered reduced iPhone performance. Conversely though, Judge Koh held that plaintiffs could not establish that such injury was causally linked to Apple’s alleged misrepresentations. Judge Koh ruled that actual reliance was essential for standing. Accordingly, plaintiffs must have (1) seen the misrepresentations; and (2) acted on those misrepresentations. Judge Koh noted that none of the plaintiffs had even seen the alleged misrepresentations prior to purchasing their iPhones, or at any time thereafter. Because none of the plaintiffs had even seen the misrepresentations, they could not have relied upon such misrepresentations. Without reliance, Judge Koh held that plaintiffs’ claims could not survive.

In re Google, Inc. Privacy Policy Litigation

On December 3, 2013, Judge Paul Grewal granted Google’s motion to dismiss in In re Google, Inc. Privacy Policy Litigation, Case No. C-12-01382-PSG (N.D. Cal. Dec. 3, 2013), but not based on lack of standing. The claims stemmed from Google’s change in its privacy policies. Before March 1, 2012, Google maintained separate privacy policies for each of its products, and those policies purportedly stated that Google would only use a user’s personally-identifying information for that particular product. Google then introduced a new privacy policy informing consumers that it would commingle data between products. Plaintiffs contend that the new privacy policy violated Google’s prior privacy policies. Plaintiffs also alleged that Google shared PII with third parties to allow third parties to develop apps for Google Play.

In assessing standing, Judge Grewal noted that “injury-in-fact has proven to be a significant barrier to entry,” and that establishing standing in the Northern District of California is akin to climbing Mount Kilimanjaro. Notwithstanding the high burden, Judge Grewal found that plaintiffs adequately alleged standing.

Plaintiffs alleged standing based on (1) commingling of personally identifiable information; (2) direct economic injury; and (3) statutory violations. With respect to the commingling argument, plaintiffs contended that Google never compensated plaintiffs for the value associated with commingling PII amongst different Google products. Judge Grewal rejected this argument, noting that a plaintiff may not establish standing by pointing to a defendant’s profit; rather, plaintiff must actually suffer damages as a result of defendant’s conduct.

With respect to plaintiffs’ allegations of direct economic injury, Judge Grewal held that those allegations sufficed to confer standing. Plaintiffs argued they suffered direct economic injuries because of reduced performance of Android devices (plaintiffs had to pay for the battery power used by Google to send data to third parties). Plaintiffs also argued that they overpaid for their phones and had to buy different phones because of Google’s practices. These allegations sufficed to establish injury. Based on Judge Koh’s opinion in Apple, one key issue in the Google case will likely be whether any of the plaintiffs actually read and relied upon Google’s privacy policies.

Finally, Judge Grewal found that standing could be premised on the alleged violation of statutory rights. This ruling is consistent with the trend in other federal courts. Though Judge Grewal ultimately dismissed the complaint for failure to state a claim, the opinion’s discussion of standing will be informative to both the plaintiff and defense bars in privacy litigation.

The Apple and Google lawsuits represent a fraction of the many lawsuits seeking to recover damages and/or injunctive relief for the improper collection and/or use of consumer information. Establishing standing remains a difficult hurdle for plaintiffs in consumer privacy lawsuits, though courts are increasingly accepting standing arguments based on statutory violations and allegations of economic injuries. The Apple decision is on appeal, so we will see if the Ninth Circuit sheds further light on issues of standing in privacy lawsuits.